Though this week had initially been devoted to another entry, current events ended up pushing something far more fascinating to the forefront. A story involving Redditors, hedge funds, 2 companies employing thousands, and a boatload of money. Billions of dollars, to be precise.
Though I have seen this come up in the media a time or 2 (and even happened upon a surprisingly unbiased take on CNBC a couple days ago), my first encounter was through the Rossman Repair Group Youtube channel. Hosted by Louis Rossman, the man uses the channel to disseminate information about Macbook repair, and pretty much anything else the man feels like putting out to the world.
Though I have found great amusement in both his many detailed takedowns of people involved in New York City real estate and Apple (be it the company itself, or its brain-numbing fanboys), he recently brought this far more fascinating phenomenon to my attention. Though the video series in itself is enlightening (and will be shared below as it evolves and grows), I decided to write this in order to bring myself more clarity on the situation.
I’ll start with Rossman’s video.
Though Louis obviously didn’t intend on becoming a sort of unofficial narrator of this moment/phenomenon (whatever we want to call it), it’s safe to say that he has become an important source of information none the less. While it is true that neither he nor I are experts in the field of finances, there is no need to take our words at face value. Unlike the hedge funders on the flip side of this picture, I encourage you NOT to take our words at face value.
Do some research. It’s Good for you.
While I try not to ever use George Carlin as a means of confirming my personal ideological bias (“Clearly, George Carlin would think Trump supporters are ____________!”, “Carlin would think these ______________ are so hilarious!”), I can’t help thinking that this movement would be highly amusing to the man. Though I always consider his acts about us all having ringside seats to the freakshow when considering “Carlin would _____________” statements, even I admit that this moment is funny enough to grant a Carlin reaction.
After all, what is not to laugh about a bunch of foul-mouthed Redditors completely wrecking the week of a gaggle of hedge fund parasites? Considering that 2020 begun with almost World War 3, a plane crash and then an ongoing plague of doom, I’ll take it 2021! Let the decade OFFICIALLY begin!
Anyway, now that my unashamed bias has been made clear to everyone, we can begin.
We will start with a concept that I initially struggled with understanding as the week commenced. That is the concept of short selling, or shorting a stock. What exactly does this entail?
Traders may use short selling as speculation, and investors or portfolio managers may use it as a hedge against the downside risk of a long position in the same security or a related one. Speculation carries the possibility of substantial risk and is an advanced trading method. Hedging is a more common transaction involving placing an offsetting position to reduce risk exposure.
In short selling, a position is opened by borrowing shares of a stock or other asset that the investor believes will decrease in value by a set future date—the expiration date. The investor then sells these borrowed shares to buyers willing to pay the market price. Before the borrowed shares must be returned, the trader is betting that the price will continue to decline and they can purchase them at a lower cost. The risk of loss on a short sale is theoretically unlimited since the price of any asset can climb to infinity.
Note: I am not an expert in financial services advice. All investment information that follows is strictly theoretical. If I knew what I was talking about, ide be on CNBC.
Consider yourself warned.
Though Louis explained the concept well in one of the videos above, this about sums up the situation for even the most confused layman. If you suspect that there is another Enron or Leiman Brothers playing fast and loose in the stock market, you can potentially gain by borrowing high priced shares, then returning them when the stock price tanks. I specifically mentioned Enron as it’s precarious position was initially exposed by in-depth researching short sellers.
While the man who predicted (and made bank from!) the demise of Enron has reportedly been losing his shirt in shorts of Tesla stock, I find this choice highly fascinating. If there were any companies that I personally would be banking on failing, I would personally focus on . . . any other automaker!
Frankly, if you made me pick one . . . Chrysler. Though I have a sense that all of the American automakers are going to have a rough go of it in the next few years to a decade, none seems less prepared for the EV transition than Chrysler. Or should I say Stellantis NV, the market name of Stellantis, the parent company of Fiat Chrysler and a handful of car companies that I have never even heard of (including some high-end brands).
Someone feels that this multi-national entity is not just worth a rising stock price, but also an increasing credit rating. So maybe not the best stock option to short right now, after all.
Either way, you get the picture. If the Trump Organisation was not a privately held firm, I would have started shorting the hell out of that sucker over a year ago. Or if I wanted to make money off Boeing, jumping on board after the Lion Air and Ethiopian Airlines crashes would have made for one hell of a payday.
Of course, a payday bathed in the blood of 346 people. But that is just a minor detail, after all. Everyone has to die sometime. Whether it be at the hand of stock bolstering cost-cutting measures, or natural causes.
After all, if there is one trait that is more prominent on Wall Street than greed, it’s psychopathy.
The reason why these companies would be selected for shorting the stocks is relatively apparent. AMC is mainly known for its chain of theatres, an industry of which COVID has given a shit-kicking. And Gamestop is a brick and mortar gaming retailer in an era of direct downloads and Amazon. You don’t need to be a rocket scientist to figure out what the short-sellers concluded.
From what I have come to understand, however, the short-sellers here went above and beyond what was just business as usual. If I understand correctly, the stock was being shorted so much that its level itself would start to present barriers for the company itself to continue its day to day operations. For example, it may become more and more difficult to obtain credit to cover operating costs. Which could theoretically push the business into bankruptcy, and earn the short sellers a maximum of margin, being first in line once the company is carved up and auctioned off.
The party was great while it lasted. All it took was the unwashed masses through their little subreddit slash discord server(s) to bring the music to a stop, however.
After a quick browse of the subreddit (as well as adding myself to it, because fuck the system!), I have come to a similar conclusion as Louis Rossman did. This is not a hacker collective or a group of alt right-leaning bigots. This appears not unlike many other subreddits of which I have seen, or are a part of. It is made up of a mish-mash of everyday people, just as many collectives on the internet and elsewhere are. And like those other places, they don’t always speak as though they are on prime time TV. If you go there and expect not to see fuck, shit, retard, dumbfuck etc. . . expect to be disappointed.
It’s all in the name. . . Wall Street bets. Big Tenders of today being AMC, GME (Gamestop), NOK (Nokia) and BB (Blackberry). All of which many are barred from purchasing shares into to prevent market volatility.
Because the more of the shares everyday investors purchase and hold, the bigger the losses of the people who shorted the stock.
Remember that the losses from stock shorts are theoretically unlimited since there is no limit to how much a stock can grow. As such, limiting the growth of the stock only serves the best interests of the short-sellers. It does not serve in the best interests of the investors (all of whom KNOW the risk of investment). Nor is it in the best interest of the company itself, which could leverage its newly found sky-high stock price as a way to find a way back to profitability VIA further investments.
Looking at it from this angle, limiting sales of stocks to stem volatility in the markets (to quote the brokerage houses) is both antithetical to a truly free market and bad for both investors and companies (short of shorters, anyhow).
As of this writing, Melvin Capital (the fund that had originally shorted Gamestop) has apparently purged itself of the now painfully valuable stock positions it once held. But not before taking a healthy kick in the balls in terms of money lost on the investment. Or to put it another way:
I also came across this interesting article excerpt:
Seeking fast profits by gambling on heavily shorted stock isn’t a new investing strategy. But thanks to the easier access to stock trading provided by retail trader platforms like Robinhood in recent years, the impact of retail traders has grown into a full-blown phenomenon that’s actually pushing some hedge funds into bankruptcy and seriously worrying professionals.
Melvin Capital, which has lost billions of dollars on GameStop alone, is joining forces with other hedge funds, receiving a $2.75 billion cash infusion from Steve Cohen’s Point72 and Ken Griffin’s Citadel to help it weather the storm.
On Tuesday, famed “The Big Short” hedge funder Michael Burry, whose bullish position on GameStop in 2019 laid the foundation for a retail investor frenzy, posted a now deleted tweet condemning the craze on GameStop stock as “unnatural, insane, and dangerous” and called for legal and regulatory action against those involved.
First of all, there is NOTHING natural about the stock market. As for how he can see the like between the insanity and danger of every OTHER part of the system, and this bewilders me. But that is not what this is about.
What we see here is interesting. Though I had never heard of Robinhood before today, I have seen ads for these digital trading platforms all over the place online. In fact, I was even invited to one by a friend recently. A friend no doubt attracted to the market by all of this.
The markets are no longer just for the rich fucks, or whoever is commanding my company administered pension fund. Anyone can seemingly sign up, jump on, and start buying and selling. Democracy in action on Wall Street.
Makes me feel like getting in on a few airline stocks.
Anyway, the quoted article says a lot more than that if you read between the lines. The first lesson is that you can BET that these hedge fund assholes are not going to learn their lesson. They have enough money and institutional power to keep attempting to drag the status quo back into their favour. But more importantly, they have enough media presence to take full advantage of the average citizen and lawmaker’s complete ignorance in terms of how the market works.
This is not hacking. This is not market manipulation in a negative sense. And this is certainly not the dastardly shenanigans of the Alt-right, or otherwise, people trying to make a statement aside from “FUCK PARASITIC HEDGE FUNDS!”. What this is is just, the market working the way it does. And for once, seemingly the little guy getting a lead over the giants of trading.
If money equals free speech then it is the ultimate in the democratization of Wall Street.
That the short stock investment in GME went tits up based on the voluntary and COMPLETLY legal stock purchases of many retail equities purchasers (my retirement portfolio calls its stock options an Equities Fund) is just bad luck.
You wouldn’t think that I would have to quote an oldie from Kenny Rogers to these veterans of Wall Street.
You gotta know when to hold em’,
know when to fold em’,
know when to walk away,
and know when to STOP SHORTING THE STOCK TO THE POINT THAT A BUNCH OF NAMELESS PRIVATE INDIVIDUALS CAN LIBERATE YOUR ASS OF MILLIONS OF DOLLARS SIMPLY BY PURCHASING A FUCKING STOCK!
I don’t know how long Gamestop, AMC or any of the other companies on the Wall Street shortlist are going to last in the open market after all of this settles and the world moves on, but I can feel assured that their many employees still have jobs at least in the near future. Though it can’t be denied that both companies exist in industries that are FAR from future proof, at least the vultures that want to speed up the process of demise seem to have been scattered.
One thing is for sure, however. This has put the US on the precipice of . . . something. And a large part of where this ends up is likely going to be tied up in who is driving the narrative. If it is the Wall Street firms and insiders, then expect a tidal wave of anti-competitive retribution. If it’s driven by facts and reality . . . then frankly, I don’t know what to expect.
I would LOVE to see the US government be just as aggressive in reining in the often livelihood wrecking and reckless actions of Wall Street Hedge Funds as they are with companies like Boeing playing fast and loose with aviation regulations. But I would settle for the simple NON-vilification of a group of investors that royally screwed over one of Wall Streets’ more notorious firms.
Whatever happens, what a nice pallet cleanser this has been to the previous 3 to 4 years.
Stock GME/AMC/BB & Other Stock Purchase Blocks
I had mentioned earlier in this piece that some brokers had initially blocked any traders from purchasing several of the so-called volatile meme stocks in the past day or so, which came across as suspicious. Though it was SAID to be in the best interest of the traders, any other circumstance would have those traders lose every dime since they signed on the dotted line and should have known the risks. Which makes it seem as though it’s to keep the hedge funds (like Melven capital) in the clear.
However, aparently it is not that simple. If I am understanding it correctly, there exists an entity between brokerage firms called clearinghouses. Standing between buyers and sellers of financial instruments (as these things are called), they help facilitate the transaction between the 2 parties.
What Is a Clearing House?
A clearing house is an intermediary between buyers and sellers of financial instruments. It is an agency or separate corporation of a futures exchange responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data.
Role and Function of a Clearing House
A clearing house takes the opposite position of each side of a trade. When two investors agree to the terms of a financial transaction, such as the purchase or sale of a security, a clearing house acts as the middle man on behalf of both parties. The purpose of a clearing house is to improve the efficiency of the markets and add stability to the financial system.
I came across this information in yet another Rossman video, wherein he was trying to answer the same question posed here (“Why stop the purchase of shares?”). And the answer is explained more or less in this video. If you don’t have the time or the patients that I do to watch it, I’ll go through the information afterward.
If I understand it correctly, it goes like this.
The investor decides they want to short AMC, GME, BB, Boeing, whatever fledgeling company stock. The broker takes and registers the trade with their clearing house (be it an internal or an externally contracted entity, such is the case with most app-based trading platforms).
If the stock does the unthinkable and goes UP, the broker covers the loss and goes back to the trader with a bill (if it’s not already settled). If the bill can’t be settled, small amounts are written off as a loss and such is the cost of business. If the brokers end up with enormous losses it can’t cover, however, the clearinghouse steps in.
The problem here is that allegedly, the shorts that Melvin Capital had incurred on GameStop were so risky as to involve more cash than even the clearinghouses could provide, had the sales gone through. Everyone had no choice but to limit the sale of a few shares because Melvin Capitals’ actions could have stalled the entire marketplace. Not only would people not be able to buy AMC/BB/GME, etc, no one would be able to buy anything.
In theory, a portion of my retirement plan (which is 50% invested in equities!) would not be able to function properly because of a few reckless idiots pushing for an even bigger payday.
That there is no crime here is shocking. Actually, not really. Of course, we didn’t learn anything from the 2008 debacle!
Robinhood & Other Trading Platform Auto-selling GME Stocks “For The Benefit Of Traders”
I came across this allegation on Twitter late last night, and it really caught my attention. Whilst one could skew blocking the purchase of some company stocks as its own form of market manipulation (or even the censorship of the free speech of individual traders, if we take that route), if this allegation proves factual, it’s much worse. I can’t see it as anything short of theft.
Imagine your bank shows up and takes your car (of which you have made the majority of, if not all of, the payments on!), claiming they sold it for your own good. They thought you couldn’t afford it on your budget, they thought . . . it doesn’t matter. If there is no insolvency involved, I don’t see how this ISN’T theft.
To look into this, I hit up my favourite search engine, the first link sending me back to WallstreetBets.
Man . . . of all the places I wouldn’t have expected to cite as a source on trading. But none the less, it seems apparent in the way it’s explained here. Purchases on margin are basically purchases on credit. Which would seem to make this a way for Robinhood to keep its liabilities under control. Considering that this phenomenon is likely eventually to end at some point, I can’t fault a broker for not wanting to be stuck with a ton of accounts that are in arrears.
I do not understand what the term Margin call implies, however.
What Is a Margin Call?
A margin call occurs when the value of an investor’s margin account falls below the broker’s required amount. An investor’s margin account contains securities bought with borrowed money (typically a combination of the investor’s own money and money borrowed from the investor’s broker). A margin call refers specifically to a broker’s demand that an investor deposit additional money or securities into the account so that it is brought up to the minimum value, known as the maintenance margin.
A margin call is usually an indicator that one or more of the securities held in the margin account has decreased in value. When a margin call occurs, the investor must choose to either deposit more money in the account or sell some of the assets held in their account.
This seems to clear things up.
Though it seems that the margin call on these accounts is quite convenient (as noted not so eloquently by the WallStreetBets participants), this seems like more of an unfortunate standard procedure than anything else. One driven by an unusual situation (removal of the option to buy a stock is not a regular occurrence).
This is the line that Robinhood is telling the media, despite users submitting seemingly contradicting data.
A spokesperson for Robinhood said these small sellers are wrong about how their shares were sold. “I can confirm that claims that Robinhood proactively sold customers’ shares outside of our standard margin-related sellouts or options assignment procedures are false,” the spokesperson told The Verge.
On Wednesday, Robinhood warned some investors with options in GameStop and AMC that it may automatically sell off their stakes to reduce risk, the spokesperson said. But these investors told The Verge they didn’t have options in GameStop or AMC and hadn’t purchased the stocks on margin. They had purchased the shares outright, they said, and were planning to hold onto them.
Margin orders occur when an investor borrows money from the broker (in this case Robinhood) to complete a sale, and brokers can call in those shares if they’re worried the investor can’t pay up. According to Robinhood, most of its actions have been calling in options to purchase shares — a more aggressive move, but not unprecedented. But if users fully owned their shares, as these traders claim they did, selling the holdings would be far more unusual.
The Verge saw screenshots from six traders indicating that their purchase of GameStop or AMC stock had been filled within Robinhood. Six traders sent screenshots showing that their stock in these companies had been sold, with four clearly indicating that they had been sold today. Another trader sent screenshots showing a purchase of Naked Brand stock being filled and then sold within the app. The screenshots don’t indicate how the purchases were funded or how the sales were initiated, but in several of them the app displays a message saying, “We’ve received your order to sell [#] shares of [stock] at the best available price.”
Traders who spoke with The Verge said they were disappointed to lose their stake in these companies. The traders had been planning to keep the stock for longer, and several said they certainly wouldn’t have sold it at the point that they believe Robinhood pushed through the transaction, as GameStop’s stock was faltering from a nearly $500 high.
“It’s extremely dishonest trade on their part and unacceptable,” Ian Q., who said Robinhood unexpectedly sold his shares in GameStop this morning, told The Verge.
I sense that this is less a case of malicious practice than it is new user ignorance of policies. But I could be wrong (this going for anything covered in this post).
Anyway, I think I have covered pretty much everything that I had intended on touching on with this post. If you think I got something wrong (or otherwise just have something to say) feel free to drop by the comment section below.
This has only been up for an hour or so and I already feel a need to make a change to it. While I ended this by giving many involved the benefit of the doubt, recent information tells me that may have been a mistake. Though it starts with yet another installment of Louis Rossman coverage, I’ll back the findings with other links as well.
And again, I find myself heading over to Wall Street Bets. Because, why not.
For those confused what this chart means, this is the options chain for all BB options that expire tomorrow (1/29). Look at the Open Interest (OI) column, this indicates the total number of option contracts that are held by investors in active positions. The Volume represents the number of options contracts being exchanged between buyers and sellers.
There is a huge drop off in options contracts below $15. If BB closes tomorrow below $15, then all these contracts will expire worthless. If BB closes above $30 tomorrow, then all these contracts will be ITM and Wallstreet will have to fork over a pretty penny to pay these out. They are manipulating the stock for their benefit.
Edit: Getting a lot of private messages about this, If you have to ask which option you should buy tomorrow, just buy shares. This is just my person opinion and not professional investment advice.
Edit2: For those asking if we don’t hit $30/$20/$15 today, still hold your positions. Wall Street is trying to scare us into selling. The higher the price today, the maximum the pain to their wallets, but this stock trends with GME/AMC. Once they go up we go up. The squeeze is not over!
At this point, I can’t YET find anything else to confirm or deny the accusation being made by Rossman or the WSB poster I quoted above. But stay tuned. This isn’t over yet!
Edit #2 (02/03/21)
It’s been about 4 days since this post went live, and I/We have learned quite a bit more about the situation. In particular, I now realize that my grasp of what is shorting a stock does not seem to be presented correctly. Given that nearly every single news commentator (short of the financial press) seems to have had the same problem, however, I don’t feel all that dumb.
I’ll just try again.
I do some research into company A and decide that based on my findings, the company is likely on a downward trend. So I use my broker to borrow a stock (or likely, more than 1 stock) in the company (to be paid for at a later date), then sell these stocks back onto the open market. The bet here is that the companies value will decline, and the stock price will go down with it. Since the stock price has gone down in value in the time since they were borrowed, the price you have to pay to buy back the stock (and return it to the original stockholder) is reduced. Leaving the leftover as your return.
If the stock goes the other way, however (Up!), then things get dicey for those in a short position. Without getting into interest or other penalties that brokers change, at the very LEAST, you will be paying more for every share of stock that you borrowed and sold on the open market.
Say you borrowed 100 at $60 a share, that is $6000 to start with. If the price goes bullish and ends up at $250 a share just before you have to return your borrowed shares, that’s $25,000. If you are a hedge fund that borrowed 1 million shares at $60 a share, that is $250 million dollars. And this isn’t considering interest or any other factors!
So, I think I’ve FINALLY have that figured out.
When it comes to the other issues surrounding this situation (mainly Robinhood), I don’t know enough to really have a say that is anything beyond speculation (hehe). I sense that we will learn more once the FTC, SEC and other entities start sorting out this matter in the coming months and (maybe) years.
As for who is in the wrong here, I’ve seen an interesting mix of opinions. On one hand, some (mainly those with Wall Street interests, but not exclusively) view the Wall Street Bets subreddit and Discord servers as causing market manipulation by way of collusion. There is in fact a legal precedent for collusion, even if it occurs on platforms open and accessible to anyone.
However, this view is heavily challenged by every person’s right to free speech, their right to openly post about what stocks and companies they would like to see rocket to the moon. To my surprise, even people like Jim Cramer and Kevin O’Leary are siding with WSB and retail traders on this one.
Whatever the case may be, this has all proven very fascinating and interesting. Far from the only time in the past 4 years wherein even the most well versed in federal law couldn’t give us a clear answer in terms of whether an act was lawfully incriminating or benign. For once, though, the crime isn’t incredibly self-serving and/or stupid, and the public generally is on the winning side. As opposed to yet again watching the corruption of a rich sore loser get away with something again.
Though this is far from the end of this story, I’m ending my exploration of it here. It certainly has been a fascinating ride.
And now, we wait and see what comes of this. More importantly, we wait and see which interests are prioritized by the entities under the Biden Administration.
Will we see more regulation of hedge funds to prevent the shorting of more stocks in companies than actually exists?
Or will we see regulators clamp down on retail trading brokers like Robinhood, thereby making it harder for everyday people to get into the Wallstreet game with the big boys?
I hope that the answer lies somewhere in the midst of those 2 extremes. But I also am cynical when it comes to government actions in the presence of huge amounts of lobbyist cash. Particularly when the cameras go away and people stop paying close attention to this story.
Whatever the case, what a way to kick off 2021.